SUPREME COURT OF INDIA
Asea Brown Boveri Limited
Vs
Industrial Finance Corporation of India
Civil Appeal No. 3574 of 1998
(R. C. LAHOTI (CJI)
and Ashok Bhan)
27/10/2004
R.C. LAHOTI (CJI), J.
1. This is an appeal under Section 10 of the Special Courts (Trial of
Offences Relating to Transactions in Securities) Act, 1992 (hereinafter 'the
Act'), for short), feeling aggrieved by an order dated 28.7.1998 whereby
rejecting an objection petition preferred by the appellant, the Special Court
has directed the appellant to hand over possession of all the 56 cars to the
custodian within one week from the date of the order.
2. The Industrial Finance Corporation of India (hereinafter 'IFCI', for short)
is a Corporation constituted under the Industrial Finance Corporation of India
Act, 1948 and carries on the business of financing moneys to various borrowers.
Vide agreement dated 4.12.1990, the appellant entered into a Lease Finance
Agreement with M/s. Fairgrowth Financial Services Limited (hereinafter
'Fairgrowth', for short), the respondent No. 3. Pursuant to the letter of offer
dated 26.7.1990 under this lease finance agreement, the appellant had taken
lease finance of total 57 cars but of which one car was foreclosed in or about
January, 1992, leaving 56 cars under lease finance with the appellant.
3. The case of the appellant as regards these 56 cars and the relationship of
the appellant and respondent No.3 in so far as these cars are concerned is
stated as follows. The Appellant Company deposited total security amount on the
56 cars of Rs. 20,97,447.25 paise. The total rental payable by the Appellant
Company for 5-year period amounted to Rs. 85,35,379/-. The total purchase price
of 56 cars is Rs. 84,80,664/-. As per the terms of the lease finance agreement
mutually agreed into by the parties, the Appellant Company was required to pay
25% of the purchase price of the cars as security deposit carrying interest @
5% per annum compounded half yearly, a lease management fee of 1% and lease
rental of Rs. 15/- per thousand Rupees per month of the cash price of the
assets which was later revised to Rs. 16/- per thousand Rupees per month by a
subsequent letter."
4. It is further alleged that it was the tacit understanding between the
parties that the cars were to be transferred to the Appellant Company at the
end of initial lease period of 5 years for which the parties agreed in their
agreement by stating that the terminal fee will be 20%, meaning thereby that on
payment of 20% of the cost price of the cars the said cars would be transferred
by the Lessee Company to the Appellant Company or their nominee. The term
terminal fee is a well known term in Lease Finance Transaction and has no other
connotation than the amount payable for transfer of the leased asset. This
lease finance agreement was entered into on 4th December, 1990."
5. Fairgrowth became a notified party under sub-section (2) of Section 3 of the
Act due to certain illegal transactions covering the period between 1.4.1991
and 6.6.1992. The transaction entered into on 4.12.1990 pursuant to letter of
offer dated 26.11.1990 is not referable to the period during which the alleged
illegal transactions were entered into by Fairgrowth.
6. The Central Government appointed IFCI as the custodian, under sub-section
(1) of Section 3 of the Act, over the properties belonging to Fairgrowth. The
Appellant Company continued to make payment to IFCI in place of Fairgrowth as
per lease finance agreement. An amount of Rs. 30, 96,948.30 paise was paid by
the appellant to Fairgrowth till December, 1992. An amount of Rs. 44, 61,273/-
was paid by the appellant to the custodian IFCI. Thus the total lease rentals
actually paid by the appellant company are Rs. 75,31,842/- till May, 1997
whereas the rentals which were payable by the appellant company were Rs.
85,34,379/- only.
7. According to the appellant company under lease finance agreement, it had
made a security deposit with Fairgrowth on which an interest of 5% per annum
compounded half yearly was to be paid. The appellant made a communication to
the custodian clarifying that the appellant would be entitled under the
agreement to the amounts on account of security deposit and interest accrued
thereon at the time of buyback or purchase of lease assets by the appellants.
On 9.4.1997, the appellant forwarded a cheque of Rs. 17,800/- in full and final
settlement of dues under lease finance agreement dated 4.12.1990. According to
the appellant, the payment of this amount squared up fully and finally its
liability for payment subject to adjustment of security deposit and interest
agreed thereon and all that remained to be done thereafter was to transfer the
said 56 cars in favour of the appellant company after cancellation of the hypothecation
which obligation was to be discharged by the custodian which had taken over the
properties of Fairgrowth.
8. A perusal of the detailed order passed by the Special Court shows that the
Special Court shows that the Special Court refused to treat the transaction
between the appellant and Fairgrowth as one of lease finance and instead
treated it to be a transaction of lease only i.e. the appellant holding 56 cars
as lessee of Fairgrowth. The principal reason which prevailed according to the
Special Court is that in its application, the appellant had stated the
transaction to be of 'lease' and not of 'lease finance'. Thus the Special Court
has rigidly applied the rules of pleadings but a perusal of the order shows
that there has been no effort to scrutinize and interpret the documents
evidencing the transaction so as to determine the real nature thereof.
9. This appeal was filed on 31.7.1998. On 3.8.1998, the court passed an interim
order protecting the possession of the appellant over the 56 cars.
10. On being noticed, the custodian has in its response filed a calculation
sheet prepared by a Chartered Accountant appointed by the Special Court and,
according to his calculation, an amount of Rs. 6,48,370/- was due and payable
by the appellant to the respondent No.3 as per the agreement entered into
between the parties. A perusal of this calculation sheet shows that the main
factor responsible for the variation in the ultimate figure of balance payable
is attributable to an amount of Rs. 4,89,923/- being sales tax calculated @ 5%
on the amount of total lease rent including terminal fee which figure of sales
tax the chartered accountant feels is leviable on the transaction and hence
payable by the appellant. This is a highly debatable issue but need not detain
us. Whether or not this amount is held to be due and payable by the appellant,
it will not change the nature of transaction. The correctness of the
calculation has been disputed in the rejoinder filed on behalf of the appellant
wherein it is submitted that all sums due and payable under the lease finance
agreement dated 4.12.1990 were already paid and nothing was due and payable at
all to any of the respondents by the appellant. Even 20% terminal fee, as
purchase price of the 56 cars, had been paid and nothing had remained to be
done except termination of hypothecation and transferring on paper of the
ownership of the cars to the appellant which was only a matter of formality
necessarily flowing from the obligation of respondent No.3 under the agreement and
accounts having already squared up. The documents show that the registration of
the cars since inception stands in the name of the appellant.
11. During the course of hearing before this Court, it was conceded at the Bar
that so far as the transaction between the respondent No.3 and the appellant as
evidenced by the agreement dated 4.12.1990 is concerned, it is a transaction of
lease finance and the rights and obligations of the parties have to be worked
out accordingly.
12. We have heard at length, the learned counsel for the parties. We also
requested Shri Uday U. Lalit, Senior, Advocate, to assist the Court by pointing
out the correct position of law centering around lease finance transactions. We
place on record our appreciation of the assistance rendered by the learned
senior counsel, Shri Uday U. Lalit.
13. What is a lease finance? According to Dictionary of Accounting &
Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996 at
page 136):-
"A Finance Lease is one where the Lessee use the asset for
substantially the whole of its useful life and the lease payments are
calculated to cover the full cost together with interest charges. It is thus a
disguised way of purchasing the asset with the help of a loan. SSAP 23 required
that assets held under a finance lease be treated on the balance sheet in the
same way, as if they had been purchased and a loan had been taken out to enable
this." $ * (emphasis supplied)
14. In Lease Financing & Hire Purchase by Dr. J.C. Verma (4th Edition, 1999
at p.33), Financial Lease has been so defined:-
"Financial lease is a long-term lease on fixed assets, it may not be
cancelled by either party.
It is a source of long-term funds and serves as an alternative of long-term
debt financing. In financial lease, the leasing company buys the equipment and
leases it out to the use of a person known as the lessee. It is full payout
lease involving obligatory payment by the lessee to the lessor that exceeds the
purchase price of the leased property and finance cost.
Financial lease has been defined by International Accounting Standards
Committee as 'a lease that transfers substantially all the risks and rewards
incident to ownership of an asset. Title may or may not eventually be
transferred." Lessor is only a financier and is not interested in the
assets. This is the reason that financial lease is known as full payout lease
where contract is irrevocable for the primary lease period and the rentals
payable during which period are supposed to be adequate to recover the total
investment in the asset made by the lessor". $ * (emphasis supplied)
15. According to Lease Financing & Hire Purchase by Vinod Kothari (Second
Edition, 1986, at pp. 6 & 7), a finance lease, also called a capital lease,
is nothing but a loan in disguise. It is only an exchange of money and does not
result into creation of economic services other than that of intermediation.
The learned author has quoted T.M. Clark, one of the most authentic writers on
the subject who defines lease and operating lease in the undergoing words:-
"A financial lease is a contract involving payment over an obligatory
period of specified sums sufficient in total to amortise the capital outlay of
the lessor and give some profit."
"An operating lease is any other type of lease - that is to say, where the
asset is not wholly amortised during the non-cancellable period, if any, of the
lease and where the lessor does not rely for his profit on the rentals in the
non-cancellable period." *
16. The features of the financial lease, according to the learned author are as
under:
"1. The asset is use-specific and is selected for the lessee specifically.
Usually, the lessee is allowed to select it himself.
2. The risks and rewards incident to ownership are passed on to the lessee. The
lessor only remains the legal owner of the asset.
3. Therefore, the lessee bears the risk of obsolescence.
4. The lessor is interested in his rentals and not in the asset. He must get
his principal back along with interest. Therefore, the lease is non-cancellable
by either party.
5. The lease period usually coincides with the economic life of the asset and
may be broken into primary and secondary period.
6. The lessor enters into the transaction only as a financier. He does not bear
the costs of repairs, maintenance or operation.
7. The lessor is typically a financial institution and cannot render
specialized service in connection with the asset.
8. The lease is usually full-pay-out, that is, the single lease repays the cost
of the asset together with the interest." *
17. In our opinion, financial lease is a transaction current in the
commercial world, the primary purpose whereof is the financing of the purchase
by the financier. The purchase of assets or equipments or machinery is by the
borrower. For all practical purposes, the borrower becomes the owner of the
property inasmuch as it is the borrower who chooses the property to be
purchased, takes delivery, enjoys the use and occupation of the property, bears
the wear and tear, maintains and operates the machinery/ equipment, undertakes
indemnity and agrees to bear the risk of loss or damage, if any. He is the one
who gets the property insured. He remains liable for payment of taxes and other
charges and indemnity. He cannot recover from the lessor, any of the above
mentioned expenses. The period of lease extends over and covers the entire life
of the property for which it may remain useful divided either into one term or
divided into two terms with clause for renewal. In either case, the lease is
non-cancellable. #
18. All the abovesaid features are available in the transaction entered into by
the appellant. In addition, we find that the registration of the 56 cars
stood in the name of the appellant from the very beginning and on payment of
full amount including termination fee, as agreed upon, nothing more was needed
to be done to vest the appellant with ownership and only loan documents were
needed to be discharged and cancelled. #
19. There are certain tax benefits which by styling the transaction like a
financial lease become available to the lessor (financer) and the lessee
(borrower) both. Accounting standards have been devised consistently with which
the entries are made in the accounts so as to satisfy the requirements of tax
laws and to avail the best benefits by way of tax planning to both the parties.
20. However, so far as the Act is concerned, we have to go by the provisions of
the Act, keeping in view the real nature of the transaction ascertaining the
real intention of the contracting parties in the light of the facts and
circumstances of a given case. Once a party has been notified under sub-section
(2) of Section 3 of the Act then under sub-section (3), notwithstanding
anything contained in any other law for the time being in force with effect
from the date of notification under sub-Section (2), any property, movable or
immovable or both belonging to notified party stands attached simultaneously
with the issue of the notification and becomes liable to be dealt with by the
custodian in such manner as the Special Court may direct. A person is liable to
be notified by reference to transaction in securities between 1.4.1991 and
6.6.1992. Any contract or agreement entered into between 1.4.1991 and 6.6.1992,
in relation to any property of the notified party is liable to be cancelled, if
found to have been entered into fraudulently or to defeat the provisions of the
Act. Analysing the provisions of the Act, it was held in BOI Finance Ltd. vs.
Custodian and others 6, that the custodian
under the Act is required to assist in the attachment of the notified person's
property and to manage the same thereof. The properties of the notified
persons, whether attached or not, do not, at any point of time, vest in him. He
is merely a custodian and not a receiver nor is he a final liquidator so as to
enjoy control over the properties. In other words, the position of the
custodian is the same as that of the notified person himself. We are,
therefore, of the opinion that the custodian remains bound by the obligations
incurred by the notified party itself, if not incurred fraudulently or to
defeat the provisions of the Act.
21. For the purpose of deciding the controversy before us, it is not necessary
for us to examine whether the transaction entered into between the appellant
and Fairgrowth, the respondent No. 3, would at all attract the applicability of
the provisions of the Act in view of sub-section (2) of Section 3 thereof. The
learned counsel for the appellant has taken a very fair stand submitting that
the appellant is prepared to pay if anything in still found to be due and
payable by it but in any case the 56 cars could not have been held liable and
directed to be delivered to the custodian. It was a simple case of accounting. If
the appellants have cleared all their payments in accordance with the agreement
dated 4.12.1990, initially to Fairgrowth and thereafter to the custodian
including payment of terminal fee subject to adjustment for security deposit
and the interest accrued thereon, then all that had remained to be done was the
transfer of ownership on paper which the custodian should have been directed to
do, submitted the learned counsel. But, as we have already noticed, the
registration of the cars already stands in the name of the appellant. # On
a scrutiny of the accounts, if in the opinion of the Special Court, nothing had
been remained to be paid by the appellant, then it was only a matter of
calculation, the difference between the appellant's statement of account and
the one prepared by the Chartered Accountant at the instance of the custodian
being bonafide, the appellant could, at best, have been directed to pay the
deficit. But in no case submitted the learned counsel for the appellant, the 56
cars could have been directed to be delivered to the custodian. In spite of
having made full payment (bonafide error or dispute as to calculation
excepted), direction of delivery of cars to the custodian has caused failure of
justice. We find ourselves in agreement with the submission so made.
22. The appeal is allowed. The impugned order dated 28.7.98 passed by the
Special Court is set aside. The application filed by the appellant shall stand
restored on the file of the Special Court. The Special Court shall look into
the accounts after affording the parties an opportunity of hearing and
determine if any amount, and if so to what extent, remains still payable by the
appellant to the custodian, for and on behalf of Fairgrowth, the respondent
No.3. In the event of any amount being held liable to be so paid, the same
shall be paid by the appellant within the time appointed by the Special Court
failing which the appellant shall be liable to be proceeded against including
for attachment of property.
23. No order as to the costs.